SEC Charges CFO with Diverting Company Dollars

On September 28, 2012, the Securities and Exchange Commission (SEC) charged the former chief financial officer (CFO) of a Minnetonka, Minnesota-based manufacturer of computer networking devices for secretly diverting company funds to cover unauthorized personal expenses and other employees' entertainment expenses that lacked any legitimate business purpose.

The SEC alleges that Subramanian Krishnan, the former CFO of Digi International, evaded the company's internal controls that he created in order to approve employees' falsified travel and entertainment expense reports over a five-year period. Krishnan also manipulated internal controls to review and approve his own expense reports that included unauthorized hotel and entertainment expenses. By doing so, Krishnan demonstrated a lack of management integrity.

Krishnan has agreed to settle the SEC's charges and consent to an officer-and-director bar and financial penalties that will be determined in court at a later date.

"Krishnan diverted company dollars for activities that were personal entertainment expenses," said Kenneth Israel, director of the SEC's Salt Lake regional office. "Krishnan basically reviewed and approved his own expense reports by thwarting self-designed internal accounting controls that are supposed to detect such misuse of corporate assets."

According to the SEC's complaint filed in US District Court for the District of Minnesota, Krishnan's scheme began as early as March 2005 and continued until May 2010, when he resigned. Digi's internal controls required the CFO's expense reports to be approved by the CEO. In order to circumvent this internal control, Krishnan arranged for the Hong Kong office to submit his expenses as belonging to other employees. This way, Krishnan had the final authorization to approve the expenses and reimburse the Hong Kong office directly, rather than needing CEO approval.

The SEC alleges that as the scheme went undetected, Krishnan submitted or approved large numbers of fraudulent expense reports for purported work and travel expenses. Krishnan knew the expenditures violated Digi's travel and entertainment policies because he personally drafted and approved these internal policies. Despite this knowledge that he was evading Digi's internal controls, Krishnan signed each of Digi's annual and quarterly reports over a five-year period and, as part of those filings, certified that Digi's internal controls were effective. He also signed twenty management representation letters to auditors that falsely asserted he had no knowledge of fraud involving management having a significant role in internal controls over financial reporting.

The SEC's complaint alleges that Krishnan, who lives in Plymouth, Minnesota, violated the antifraud, issuer reporting, internal controls, books and records, filing certification and lying to auditors provisions of the federal securities laws. Krishnan has consented to the entry of an injunction from future violations of those provisions, with disgorgement, prejudgment interest, financial penalties as well as the duration of the officer-and-director bar to be determined by stipulation of the parties or motion of the SEC at a later date.